Nagarjuna Construction: Growth momentum to sustain…
Nagarjuna Construction Co (NCC), being a leading construction player,
is likely to benefit from the favourable macro environment. With an
order book of Rs 16,051 crore in Q1FY11 (TTM book-to-bill ratio of 3.3x),
NCC enjoys strong revenue visibility. With robust order inflows, stable
margin and comfortable liquidity position, we expect NCC’s revenues to
grow at a CAGR of 27.9% during FY10-FY12E. We initiate coverage on
the stock with a STRONG BUY rating and a price target of Rs 199/share.
Strong and well diversified order book
NCC has a strong order book of Rs 16,051 crore. The order-book-to-bill
ratio (on TTM basis) of 3.3x provides revenue visibility over the next
couple of years. Within our coverage, NCC is one of the most diversified
players, which de-risks the revenue growth from a slowdown in any
particular segment. Thus, coupled with strong order inflows on the back
of a favourable macro environment, we expect NCC’s revenues to grow at
a CAGR of 26.6% during FY10-12E.
Comfortable liquidity position
With QIP placement and stake sale in Gautami Power, NCC’s debt-equity
ratio reduced to 68% in FY10 (lowest among its peers). Going forward,
with no major equity commitment in subsidiaries (we have not factored in
equity required in the Sompeta power plant due to lack of clarity) we
expect NCC’s debt to equity to increase marginally to 92.3% in FY12E.
Diversifying into new business
NCC currently has two operational road BOT projects while three more
are expected to commence operations by Q3FY11E. After commissioning
of all BOT projects, the company expects annual revenues of Rs 300-350
crore. The company has also entered into real estate and power sectors.
Valuation
At the CMP, NCC is trading at a P/E of 13.0x in FY11E and 9.7x in FY12E
(after adjusting for subsidiaries). Considering the strong, well diversified
order book, stable margins and comfortable leverage ratios, ensuring
earning CAGR of 27.9% during FY10-FY12E, we believe the stock is
attractively priced. We are initiating coverage on the stock with strong
buy recommendation. We value the stock at Rs 199/share, based on
SOTP methodology (construction business –Rs 168/share; road BOT
projects – Rs 14/share and real estate business – Rs 17/share).
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